How smart is institutional trading?

• Main Authors: HA, Jingi, Jianfeng HU
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2020
• Subjects: Institutional trading; Hedge funds; Trading behavior; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6591; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7590/viewcontent/Smart_Inst_Trading_2020_wp.pdf
• Institution: Singapore Management University

We estimate daily aggregate order flow at the stock level from all institutional investors as well as for hedge funds and the other institutions separately. We achieve this by extrapolating the relation between quarterly institutional ownership in 13F filings, aggregate market order imbalance in TAQ, and a representative group of institutional investors’ transaction data. We find that the estimated institutional order imbalance has positive price impact in the short term, which reverses in the long term. The “smart” order flow from hedge funds generates greater and more persistent price impact than the “dumb” order flow from all the other institutions. We also find that hedge funds trade on well known anomalies around month ends while the other institutions do not.